Saudi Construction Costs to Rise With Workload, Labor Cost Next Year

BE2C2 Report: Two key drivers that will determine Saudi construction cost over the next 12 months are workload and labor cost, as project pricing is still very aggressive due to competition for work–besides the traditional areas of buildings and infrastructure, a new entrant in the construction sector are the EPCs and public-private consortiums vying for renewable and energy projects.

Many General Contractors have added on “what to bid” list non-traditional work and formed associations anticipating future biddings  to be a mix bag in the SAR255 billion (US$68 billion) contracting market.

On average, every 10 percent increase in cost of labor will swing the cost of construction by 3 per cent as various taxes levied on expat visas and continued push towards Saudization has increased the cost of labor, a report by Colliers International states.

However, the report concedes that “it is not until we see a significant drive towards recruitment in a more buoyant market, that the extraordinary effects of these regulations will be felt.”

Significantly more projects would have to commence to have a real impact on increasing margins that contractors will include within their bids. “As such, reduced competition is predicted to have a minor impact on tender pricing over the next 12 months,” says the report.

The report indicates that the average cost of construction in the Kingdom increased by 1.9 percent only during the 12 months period covering July 2017 thru July 2018.

Some inputs increased while others decreased.

For instance, the price of rebar has increased by 16.5 per cent over the period. There was a 6 per cent rise in the price of timber, 8 per cent aluminum and 1 per cent marble tile.

There was, however, a drop in the price of block work (-4.5 per cent); sand (-4 per cent); concrete (-5 per cent); and cement (-2.5 per cent).

“Contractors will not increase their profit margins until their books begin to fill. As numerous projects have been announced over the last few months and with progress on Saudi’s ‘giga projects’ gathering pace, this will help to bring optimism to the industry,” said the report.

Market is somewhat slow but there are some mega projects moving like Harmain, Neom, Qidiyya and other Red Sea projects which are expected to add fuel to the construction sector, said one Pakistani contractor’s CEO–his firm is operating in KSA as a foreign outfit under SAGIA.

Some good activities have also been noted in Oil, Gas and power sector, said one senior construction professional. Another construction professional, Engr. Jamal, who works for one of the top 5 general building contracting firms in the Kingdom, was of the view that there has been 40 to 50 percent drop in projects bidding cycle.

Meanwhile, there has been uptick in infrastructure, specially related to energy and renewables.

Talking to BE2C2/PKonweb, the CEO of a Riyadh-based EPC firm whose business group also manufactures electro-mechanical equipment, said the construction sector’s future looks promising specially in the energy field.

“In fact the energy (power and utilities) are the biggest contributors to the sector”, said Pakistani CEO Hashmi.

Syed Naeem Ali, a financial professional working for a mega infrastructure company (Riyadh-based), said several companies had downsized their manpower base, but are now desperate to hire skilled labor, as many have left and the remaining have high demands.

Freshers are not allowed therefore quality vs. quantity is a factor for consideration, he added.

“Projects are there, companies are there, but that time and timing are factors where companies have to keep an eye on.”

Therefore, in his opinion, large scale construction companies are being transformed into medium enterprises.

Another report by the Royal Institution of Chartered Surveyors (RICS) reveals that a significant number of firms in Saudi Arabia and the UAE, have reported hiring increases in the third quarter of this year, despite a decline in overall construction activity.

However, RICS added, contributors reported a sharp pullback in Q3 profit margins and an increase in payment delays across the region, a dynamic which “can be attributed to the financial constraints faced by firms”.

Going forward, demand for better and highly skilled labor and construction professionals with comparatively better wages can be expected–these incremental costs will raise bid prices’ direct costs uniformly though, however, the rise would be for more value addition to the project delivery cycle and eventually toward better markup for the contractors.

In a related Saudi construction development report, state-owned Power Construction Corporation of China (PowerChina) has announced it has won the bid for the construction of $3 billion marine facilities for the mega-shipyard King Salman International Complex located at the Arabian Gulf coastal area of Eastern Saudi Arabia.

The facility, which will be capable of building four offshore drilling platforms and 40 plus vessels annually, including three VLCCs, is considered labor intensive and requiring highly skilled professionals and part of Saudization and localization efforts.

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